At the minimum, your report should include the following sections:
1. Company Introduction – Please be brief
2. Company Performance analysis
Do a ratio analysis, focusing on short-term liquidity ratios and the ratios in Du Pont Identity. Include a stock price graph over the last 5-year（2021/06/30-2016/07/01） period. Please use the SWOT analysis to explain the driver for the good or bad performance over time.
3. Intrinsic value
Please download 5 years of monthly (2021/06/30-2016/07/01) stock prices, ending at the latest month (or the one month before), from yahoo finance on your stock and ASX200 index (symbol ^AXJO), compute monthly (or daily) returns and beta using the slope function. The slope function gives the slope estimate from a regression of stock returns (Y) against market index returns (X). If your beta is outside the normal range, which is between 0.5 to 3, you have to use the beta from Financial Times for later parts. You can search “company name beta financial times” on the internet.
For risk free rate, you may use the current 10-year Australian Treasury Bond yield from financial website resources. For market risk premium, you may use 6%. For long-term dividend growth rate, you can use the sustainable growth rate formula, historical dividend growth rate or the 10-year Treasury Bond yield. Some justifications are needed.
Use either the 1-stage or the 2-stage DDM model to compute the intrinsic value.
4. Recommendation.
Valuation Process
The method of stock valuation must incorporate a single-stage Gordon Growth Model or a two-stage Dividend Discount Model, whichever is most appropriate to your company. Essential elements of the process include:
Using past returns, estimate your company’s beta and compare it to Morningstar’s (or another commercial provider’s) estimate.
With a beta estimate, estimate your company’s required rate of return using the CAPM (see video in this folder).
Estimate your company’s future growth rate(s) in dividends, and justify your estimate.
Incorporate your estimates from steps 2 and 3 into your choice of valuation model (single-stage or two-stage model).
If choosing to use a single-stage model, justify this decision.
Calculate your model’s valuation. What main risks do you see to this valuation’s reasonableness?
If you think it can be justified, your valuation can differ from the model’s output in order to incorporate other issues you think important.
Compare your valuation with the current market price and make your recommendation.
Remember, each step needs to be justified. Further details may be provided later via an announcement on the course website.
